"Looks like things are getting back to normal," a reader told me over the phone last week. I'll admit that I agreed with him, to a certain point.

How could I not?

Over the last five weeks, oil prices retreated from around $98 a barrel to under $87 per barrel. Also, the Energy Information Administration (EIA) has been reporting a steady increase in crude stocks, which jumped last week to 300 million barrels.

Unfortunately, things aren't as rosy as they appear...

Let's look at that EIA data a little closer. Although our crude oil stocks have risen (last week it grew by seven million barrels), U.S. oil inventories are still over 24 million barrels short compared to last year. Furthermore, as far as U.S. domestic oil production goes, the U.S. is producing more than 200,000 barrels per day less and importing about a million barrels per day more than a year ago.

And what about those "plummeting" oil prices I keep hearing about? Last week's oil prices were 51% higher than last year.

I'd think twice before saying everything is getting back to normal.

In fact, I expect things to get worse before they get better. There's a chance OPEC could potentially cut production when it meets in March. The oil cartel is worried that oil demand may fall due to a U.S. economic slowdown.

In other words, don't expect oil prices to significantly drop anytime soon. And if you happen to feel that oil will fall back into the $50 a barrel range, you might have some soul searching to do in 2008.

U.S. Oil Imports in Danger

Right now the U.S. is importing over 13 million barrels of oil every day. Nearly 45% of our imports are coming from OPEC, yet as domestic consumption in those exporting countries (especially Saudi Arabia) grows, less oil will be available to export.

So if less Saudi oil is available, our other exporters oil will help out, right?

Not exactly...

First let's figure out where the U.S. is getting its oil from.

Our top five sources for oil imports in 2006 were:

• Canada
• Mexico
• Saudi Arabia
• Venezuela and
• Nigeria

Of those countries, Canada is the only one I can put much faith in. Mexico's production is in serious trouble and the rest are geopolitical deathtraps.

Energy and Capital readers are well aware of Cantarell's decline. In 2005, production at Mexico's largest oil field declined about 100,000 barrels per day. Things didn't get much better the next year, when production fell another 234,000 barrels per day. In 2007, the production fell another 30% (roughly 300,000 barrels per day).

And as if peak oil wasn't enough to worry about, Chavez is now threatening to halt Venezuelan oil exports to the U.S. due to their latest feud with Exxon Mobil. According to Chavez, the U.S. won't see a drop of Venezuelan oil if things don't work out. This threat came after a British court froze about $12 billion in Venezuelan assets.

I won't hold it against you if your first reaction is to laugh and call it an empty threat. After all, we're Venezuela's largest client. Based on the EIA's import data, the U.S. bought an average of 1.2 million barrels per day of crude oil and petroleum products from Venezuela in 2007. If Chavez stops selling us his oil, his country is going to be in trouble considering that oil accounts for more than half of government revenues.

But before you start calling Chavez's bluff, don't forget that there are a number of countries that wouldn't mind taking that extra 1.2 million barrels per day off our hands.

China and India's soaring oil consumption comes to mind. It appears that China is getting ready for more oil imports in 2008, too. Last July, the International Energy Agency (IEA) reported that China will add four times more oil refining capacity in 2008. Recently, the country approved a $5 billion oil refinery project which is expected to begin operation in 2010.

Here's the problem for us...

The U.S. is going to have a hard time making up for the loss of that oil. As bullish as I am on Canadian oil sands, I'd be concerned about whether producers in Alberta could increase production quick enough.

The Future of U.S. Oil Production

Last week, we talked about the potential increase in Bakken Oil Production. Although the U.S. has already hit its peak oil production decades ago, that's not going to stop companies from producing our oil resources. In fact, there are several potential areas for investors looking to get into U.S. oil production.

The latest buzz on the Bakken oil formation has had me thinking about U.S. oil production lately. Certainly it's not the only area where oil investments are heating up. And sometimes it's not enough for me to just read about these investment hot spots, but I'll save that for Thursday.

Until next time,

Keith Kohl

www.energyandcapital.com

P.S. Over the next decade, trillions of investment dollars will be spent to improve the world's oil infrastructure. Many of my readers have been profiting off this investment trend for years, perhaps it's time you join them. If you're interested, please feel free to check out the $20 Trillion Report here.

"Energy stocks... The only way a human is going to make any money."

-- Matt Simmons, Peak Oil's first and most vocal proponent,
and founder of the country's last pure play energy investment banking firm.

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Are US oil wells pumping to capacity or are they capped? I was under the impression that years ago, it was cheaper to import oil than to pump domestic oil.

I think that Venezuela has a problem. The US and maybe China are the only countries capable of refining the very poor oil that comes out of Venezuela. Chavez is a hot head but he is not stupid. The US is his best market.

Does anyone remember Enron, or are our lap-dog legislators be busy digging the hole we're in deeper to see the handwriting on the wall. How's it go "when you find yourself in a hole the first thing you should do is stop digging" The subcommittee headed by Senator Leahy has found that the deregulation of the commodities market by Ragan in 1983 was not a smart thing to do. There are and well always be those who will take advantage of stupidity, we need regulation to keep the wolfs at bay. Capitalism works only when the greedy pigs are kept in their pins. Anyone who thinks the gov can fix our nation's credit problems without dealing with the greed that surround the spectulation in crude oil markets are in fact part of the problem.